What could the most recent IRS proposal to restrict DAFs mean for donors and the broader industry?
Once again, the Internal Revenue Service (IRS) is scrutinizing the rapidly growing Donor Advised Funds (DAF) sector, releasing a new plan to regulate DAFs that Congress and the Executive Branch now has under review.
This is the third attempt since 2022 to place restrictions on DAFs. Luckily, the past two were unsuccessful.
A big reason for the repeated IRS scrutiny of DAFs stems from continuing concerns that very wealthy individuals are taking large tax deductions while “warehousing” funds rather than distributing them to the charities as intended by the rules that created DAFs in the first place. But the DAF payout rate is already four times higher than private foundations traditionally used by the “ultra wealthy.”
The IRS plan to regulate DAFs includes:
- Changing the definition of what constitutes a donor-advised fund so that it applies to more accounts
- Expanding the definition of donor advisers to include personal investment advisers who help manage assets in DAFs
- Imposing new penalties, including a 20% excise tax on donations that provide significant benefit to the donor.
Since the release of the latest IRS proposal, a bipartisan group of 33 Congressional tax committee members have pushed back, warning of a “chilling effect” it could have on charitable giving. They pointed out that grants from DAFs to charities increased to $52.2 billion in 2022, more than doubling in the past five years, and that DAFs have an annual distribution rate regularly exceeding 20 percent.
There is great concern in the world of philanthropy that charitable giving is in a period of decline and that further restrictions would make donor-advised funds less attractive. In addition, there is growing enthusiasm for DAFs among less wealthy and younger generations, as the accounts are easy to open and maintain. According to another recent report, nearly half of all DAFs held assets are valued at less than $50,000.
At a recent public hearing on the IRS plan in Washington, representatives of community foundations, fundraisers, lawyer associations, and public accountants, warned about the potential impacts of the proposed IRS regulations. A representative of the Association of Fundraising Professionals noted that charitable giving dropped 3.4% in 2022 to $499.3 billion, while one of the largest DAFs (Fidelity) increased its distributions by more than 5% in 2023 to $11.8 billion.
“In our estimation, the proposed regulations, if implemented, would lead to fewer dollars swiftly reaching nonprofits we care about, and we respectfully ask the Department of Treasury to reconsider its approach,” said Andrea Sáenz, CEO of Chicago Community Trust, one of the nation’s largest community foundations.
The push by the IRS to include investment advisers within the definition of donor advisers was also raised again. The IRS proposed in 2023 to place an additional excise tax on distributions made by a sponsoring organization from a DAF. Specifically, the tax would be imposed on fees paid to an Independent Advisor (IA) to a fund. Unlike investment advisers, donor advisers are not allowed to benefit directly from the account transactions they oversee.
A very old adage recommends: “Don’t fix what ain’t broken.” DAF’s have grown to $230 billion in assets today because they work. Recipients of DAF distributions depend on them to run their charities, community services, and many more eleemosynary institutions.
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– DonorAdvisedFunds.com Staff
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